Story was updated at 4:46 p.m. EST on Dec. 11
Following a fast-moving independent investigation, Macy’s Inc. said Wednesday there has been no material impact on its business from the $151 million in delivery expense accounting errors recently discovered.
During the preparation of financial statements for the third quarter ended Nov. 2, Macy’s discovered an issue related to delivery expenses in one of its accrual accounts, triggering the independent investigation which has now been completed. An employee with responsibility for small package delivery expense accounting intentionally made erroneous accounting accrual entries to hide about $151 million of cumulative delivery expenses from the fourth quarter of 2021 through the third quarter of 2024, Macy’s indicated. Macy’s did not identify the individual responsible for the errors and said that person did not pursue the acts for any personal gain. The individual was fired.
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“We’ve concluded our investigation and are strengthening our existing controls and implementing additional changes designed to prevent this from happening again and demonstrate our strong commitment to corporate governance,” said Macy’s Inc.’s chairman and chief executive officer Tony Spring, in a statement Wednesday. “Our focus is on ensuring that ethical conduct and integrity are upheld across the entire organization.”
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Macy’s also reported top and bottom line declines for the third quarter.
Net income at the retailer fell to $28 million from $41 million in the year-ago period while operating income dropped to $64 million from $83 million.
And net sales decreased 2.4 percent to $4.7 billion, with comparable sales down 2.4 percent on an owned basis and down 1.3 percent on an owned-plus-licensed-plus-marketplace basis.
On the positive side, Macy’s “First 50” locations, where the company is investing in several areas of the stores, saw comparable sales rise 1.9 percent, marking the third consecutive quarter of comparable sales growth. Bloomingdale’s saw comparable sales growth of owned and owned-plus-licensed-plus-marketplace of 1 percent and 3.2 percent, respectively. Bluemercury reported comparable sales growth of 3.3 percent.
“These results reflect positive customer response to investments in staffing, merchandising, visual presentation and eventing, which led to a 400 basis point improvement in Net Promoter Scores compared to last year, representing our third consecutive quarter of improvement,” Spring said in a conference call with retail analysts.
Discussing what’s ahead for the rest of 2024 and into 2025, Spring said that about 65 Macy’s stores will be closed this year, 10 more than previously announced. The plan to close 150 over a three-year period has not changed, Spring noted.
“I see a consumer that although remaining choiceful and looking for value, who is interested in shopping,” Spring said.
The CEO also said Macy’s Bold New Chapter initiatives will be expanded to additional go-forward locations in 2025 beyond the First 50, and that Macy’s private brand overhaul — involving adding new brands to fill voids, reworking existing ones and dropping underperforming labels — is near complete, with the home labels getting worked over next year.
The sales gains at Macy’s First 50 locations, Bloomingdale’s and Bluemercury were offset primarily by weakness in Macy’s other 50 locations as well as its digital channel and cold-weather categories. Investments at the First 50 locations have included additional staffing by women’s fitting rooms, at checkout areas and in women’s shoes and handbags and improved visual merchandising. The better-selling brands have also been beefed up while less productive brands have been edited out, making the stores cleaner.
“Our third-quarter results reflect the positive momentum we are building through our Bold New Chapter strategy,” Spring said. “We are encouraged by the consistent sales growth in our Macy’s First 50 locations and the strong performance of Bloomingdale’s and Bluemercury. Quarter-to-date, comparable sales continue to trend ahead of third-quarter levels across the portfolio. Looking ahead, we remain committed to achieving sustainable, profitable growth for Macy’s Inc.”
Bloomingdale’s gains were driven by women’s advanced contemporary apparel, as well as beauty and digital, while certain areas of the home department were soft. “Customers responded well to new brands, including Skims and Jenni Kayne and handbags have begun to show signs of improvement with strength in Tory Burch, Coach, Longchamp and Rebag, which is our recent preowned luxury accessories launch,” Spring said. He added that the “Italy With Love” campaign was “a strong driver of traffic.”
Bluemercury benefited from its 25th anniversary celebration, which kicked off in September with the unveiling of “an elevated website aesthetic with improved navigation,” four remodeled locations and eight store openings. Bluemercury plans to open nine stores and remodel two in the fourth quarter.
The company is revising its historical consolidated financial statements that were impacted by the misstatements to properly reflect delivery expense, the related accrual and tax effects. The total misstatement to delivery expense for the first half of fiscal 2024 amounted to $9 million, which was adjusted in total during the third quarter of 2024.
The company also raised its sales guidance for the year but guided down on the earnings side. Sales for 2024 are seen coming in at $22.3 billion to $22.5 billion versus previous guidance of $22.1 billion to $22.4 billion. Comparable sales are seen down 1 percent to flat, versus previous guidance of down 2 to 0.5 percent.
Adjusted diluted earnings per share are seen at $2.25 to $2.50 versus the previous guidance of $2.34 to $2.69.
Adrian Mitchell, Macy’s Inc. chief operating officer and chief financial officer, said the outlooks incorporate the revised historical delivery expense and updated delivery expense expectations for the fourth quarter and fiscal year as small package delivery expense had not been forecasted properly. The outlook, he added, assume that consumers will continue to feel financial pressure and will be “choiceful in their discretionary spend.” He also noted that the fourth quarter of 2024 is a 13-week period while the fourth quarter of 2023 was a 14-week period. On a 13-week basis, net sales are expected to be down approximately 1 percent to up approximately 1.5 percent.
“Although quarter-to-date comparable sales trends have improved sequentially from the third quarter, there are several large volume weeks still ahead,” Mitchell said. “We are pleased with recent trends, but do not believe there will be a full recapture of the lost cold-weather product sales, especially given this year’s shortened holiday season.” Unseasonably warm weather hurt outerwear and cold-weather accessory sales.
The accounting investigation had delayed Macy’s third-quarter report but the company did provide preliminary sales results that were in line with the final tally. Investors took the results in stride and traded shares of the retailer down 0.8 percent to $16.58.
But Macy’s is also dealing with some new investor pressure.
On Monday, Barington Capital Group and Thor Equities urged Macy’s to consider spinning off Bloomingdale’s and Bluemercury, create a separate real estate subsidiary, cut capital expenditures and repurchase $2 billion to $3 billion in stock over the next three years. Macy’s quickly responded to the activists’ demands with a statement from its board of directors and management team that indicated they are “committed to delivering sustainable, profitable growth and driving shareholder value. We have consistently demonstrated open-mindedness, including with respect to regularly reviewing the company’s strategy and capital allocation framework and exploring all paths to enhance value.”
The retailer added that it “remains confident” in its Bold New Chapter strategy, and that the plan “continues to gain traction across all three of its pillars.” Under the plan, the company is closing about 150 underproductive locations through 2026; prioritizing investment in about 350 “go-forward” locations, and expanding its small-format store chains, which includes Bloomie’s, and downsized Macy’s units.
While the activists are calling for Macy’s to reduce capital expenditures, they also said that they approve of Macy’s Bold New Chapter strategy, which calls for capital investment. The capital spend in 2024 is approximately $895 million compared to roughly $993 million last year.
James Mitarotonda, chairman of Barington, said Macy’s should be more like competitor Dillard’s Inc.
“Dillard’s has been executing a highly successful strategic plan focused on improving operating margins, prudently managing capital expenditures and aggressively returning capital to stockholders,” Mitarotonda said “Since fiscal year 2018, Dillard’s has paid out 60 percent of its total cumulative cash sources to stockholders versus Macy’s at 25 percent. Dillard’s stockholders have benefited greatly from this plan, seeing a total return in their shares of +788 percent versus Macy’s of -12 percent.”
While Dillard’s and Macy’s do have some similarities, both being mid-tier, full-line department stores with many shared brands, it could be difficult for Macy’s to be more like Dillard’s because of fundamental differences in how the companies are structured.
Dillard’s operations and voting stock are tightly controlled by the Dillard family, much of the store real estate is owned by the company, and it’s is nowhere near as promotional as Macy’s and sticks with full pricing to a greater degree. While the two retailers compete in major Southern cities, many Dillard’s stores are in secondary cities that Macy’s has avoided.